Where next for Amazon stock as AWS growth continues to stall?

Amazon sales top estimates…

Net sales grew 8.6% from the year before in the fourth quarter to $149.2 billion, which came in ahead of the $145.7 billion forecast by Wall Street. Growth was held back by the strength of the US dollar. When unfavourable foreign exchange headwinds are removed, the topline would have grown by 12%.

Although better than anticipated, that was still the slowest topline expansion seen during any fourth quarter on record, which is significant considering it is the busiest period for sales of the year thanks to the busy holiday shopping season.

Operating income, which is Amazon’s headline measure, came in at $2.7 billion. That was down 23% from last year, but ahead of the $2.5 billion estimate and toward the upper-end of Amazon’s guidance range.

…But Amazon’s outlook disappoints

Amazon said it is aiming to deliver net sales of $121 billion to $126 billion in the first quarter of 2023, which would be up 4% to 8% from last year. That was disappointing considering Wall Street’s forecast sits at the top-end of that range at $125.5 billion.

Operating income will be between breakeven and a $4.0 billion profit, with analysts pencilling-in $3.3 billion.

Ecommerce and AWS outlook remains shaky

Ecommerce sales declined over 2% in the latest quarter as the surge in demand seen during the pandemic continues to unwind. Sales have grown just once in the last five quarters and are expected to fall, albeit mildly, once again in the first quarter of 2023. ‘We remain nervous as everyone else is about the consumer spending and … how people will prioritise their budgets moving forward,’ said chief financial officer Brian Olsavsky.

Meanwhile, its cloud computing business Amazon Web Services saw sales rise 20%. That was the fourth consecutive quarter of slower growth and was slower than what markets had hoped for. Management warned that it has seen further softness in cloud computing in the early stages of the current quarter and expects this trend to continue, echoing a similar message sent by the management of Microsoft last week. Wall Street believes topline growth will continue to slow over the next three quarters before returning back above the 20% threshold in the final quarter of 2023.

What does this mean for Amazon?

One of the biggest concerns for Amazon investors is the slowdown at AWS. This division provides the bulk of operating profits, with its higher margins able to fund the rest of the business. But slower growth and profits leaves less cash to spend elsewhere. Operating profits from cloud computing fell for the first time ever in the fourth quarter.

In response, it will need to counter this by cutting costs. Amazon, which is much more labour-intensive than its rivals, has seen its overall workforce more than double in size since the start of the pandemic but now, with earnings under pressure, Amazon is having to reverse this and start trimming the fat after announcing 18,000 job cuts. However, with that representing just a tiny fraction of its workforce, more could be on the horizon if growth continues to stall – especially in ecommerce. It has also scaled back on more early-stage and experimental ventures that burn through cash.

Investors are wary that Amazon’s growth is stalling and that its profits, which already lag what its Big Tech rivals deliver, are vulnerable as a result. Amazon’s valuation is geared more toward its growth prospects, but these have deteriorated so it will need to demonstrate it can protect profitability and endure tougher times.

‘In the short term, we face an uncertain economy, but we remain quite optimistic about the long-term opportunities for Amazon,’ said CEO Andy Jassy.

There is an argument for long term investors to consider Amazon. Its share price is currently trading below where it was before the pandemic began and yet, the company is considerably larger now than it was back in 2019. Annual sales have grown over 80%. The number of Prime members around the world is thought to have grown from around 150 million to somewhere in the region of 200 to 250 million today. Sales and profits from Amazon Web Services have more than doubled in the last three years alone. Its advertising business has seen its topline treble and shows evidence of how newer ventures have added new catalysts that can deliver growth over the long term. However, it is clear that investors will need to get used to slower growth than what they have become accustomed to.

Where next for AMZN stock?

Investors were hopeful ahead of the results considering Amazon shares popped over 7% to hit their highest level in over three months, but this optimism has been dashed considering the stock is down 5.5% in extended hours trade today at $106.60.

The RSI was thrusted deep into overbought territory yesterday to suggest it will be more difficult to find higher ground over the short term. We could see the stock slide toward $101 if this renewed pressure persists, in-line with the floor we saw in mid-2022 and the 100-day moving average.

Recapturing the 200-day moving average is the immediate upside goal before a larger move above $125 comes into view.

The 50 brokers that cover Amazon have an average target price of $138.26, implying there is almost 30% potential upside from current levels. This has been curtailed in recent months but we saw a number of brokers raise their target price on Amazon this morning, including JPMorgan to $142 from $130, Cowen & Co to $150 from $140, Jefferies to $135 from $125, Evercore ISI to $160 from $150, Piper Sandler to $123 from $119 and Baird to $125 from $120. Credit Suisse trimmed its view to $150 from $171.

Take advantage of extended hours trading

Amazon released earnings after US markets closed and most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

With this in mind, you can take advantage of our service that allows you to trade Amazon and other tech stocks using our extended hours offering.

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